Monday, September 21, 2015

Is superior talent required to create wealth?

I'll be honest...I've been rejected and have failed plenty of times.  In fact, it became so terrible at one point, I started to believe that I just wasn't cut out for business.  These early set backs however have not stopped me from working hard as a financial professional and being well on my way to surpassing all of my long term financial goals in my thirties!  So how does one overcome failure and manage to turn it into wealth?  This is a difficult question to answer if you believe that wealth only comes from having superior talent or skills.  Although having the right talent can lead to a higher income, income however, is only a part of the larger wealth equation.

I think of creating wealth as a physical activity rather than a mental one.  In other words, it is something that you do rather than something you are good at.  For example, if you want to be physically fit then you have to have a proper diet and exercise over a long period of time.  Likewise, if you want to be financially fit then you have to save, by living below your means, and invest over a long period of time.  Unless your talent is exceedingly rare and valuable, a marginally higher income will do nothing for your wealth if you are not continually saving and investing it.

To think of it another way - Warren Buffet does not receive a million dollar paycheck every week that he then deposits into his checking account.  The value of his wealth rises with the value of the assets that he owns.  Therein lies the must own things that tend to appreciate in order to build wealth.  If the majority of things that you buy tend to depreciate or lose value, there isn’t any amount of income that will be able to plug that hole.  Finding assets that naturally appreciate isn’t a secret or a mystery either.  These are things such as mutual funds, stocks, bonds and real estate.  Don’t over think this part of it, just spread your savings around these or similar types of assets and patiently watch your financial health grow stronger over time.

Can a stock genius make me wealthy?

I definitely think that there are plenty of skilled money managers out there that play a great role in protecting wealth but I'm not so sure that it makes a whole lot of economic sense to be able to pay someone to create wealth for you.  If wealth were something that you could just buy like child care or a clean house then why are there so many people that still do not have it.  Just as with any service, money management is subject to the laws of supply and demand with the best managers charging the highest fees which tend to cancel out any potential advantages.  I think at best with the right manager and the right fee structure you could play good defense if you are already wealthy and want to focus on other things but in regards to building your own wealth only you will care enough about it to actually make it happen.  Again, building wealth does not have to be about possessing some secret knowledge but rather living below your means and using time to your advantage.

Are you convinced yet?  If not, I'll leave you with this final example to think about.  Take John and Jane...Jane is stock market wizard that can double the market's returns year in and year out due to her special skills and love for investment research.  John on the other hand knows nothing about markets but knows enough that it is smart to be invested.  Since Jane is highly skilled she earns an average of 16% every year from her investments while John is only able to average 8%.  Jane is very pleased with her abilities and feels the need to reward herself more often so she is only able to devote $10,000 a year to her investing.  John on the other hand is less sure so he saves and invests as much as he can and thus is able to devote $20,000 a year to his investing.  Who do you think has more money after ten years?  You guessed it...John actually has 36% more wealth than the stock market genius.  In fact, it takes over fifteen years for Jane to just catch up to John.  Isn't that amazing?!  You can probably count on one hand the number of people in the world that are capable of doubling the market's return over a fifteen year period.  So if you want to be part of an elite group of investors you can actually get there by saving and investing more money without any need for super secret market knowledge.

Make saving and investing a part of your lifestyle and you’ll be giving yourself an excellent chance at becoming wealthy at some point in the future.

Saturday, September 12, 2015

Market Volatility – What I’m Watching

Normally I wouldn’t be endorsing tactical investing because I personally believe that investing small amounts of money at regular intervals over long periods of time is a superior investment strategy for the majority of people.  However, being informed about current market events does help with maintaining perspective and reduces the likelihood of succumbing to emotionally based investment decisions.  So what is going on with all of this volatility that we are seeing?

There are a few key fundamental factors on the table including a potential slow down in China, worries about the future of the Euro currency and a Fed that is beginning to turn bullish on interest rates.  The main problem with a China slowdown is that many economies around the world have geared themselves towards supplying China with raw materials in order to feed its growth.  If China is perceived as going into recession there could be big losses for these economies as they slowly shift gears towards something else.  The problem with the Euro is if you imagine that you have all of your life savings denominated in Euros and you see story after story about whether the Euro will even exist in ten years…are you going to wait around for that to happen or are you going to move your savings overseas into something safer?  Both of these issues contribute to a higher dollar which is working against the Fed’s increasing desire to raise rates.

Let's talk about some prices.  On the morning of 8/24/15 S&P futures hit a low of 1831 which is an amazing 7% drop from the prior day's close.  Ever since then the market has been creeping higher and higher but has been unable to surpass 2000 for what I'm assuming are psychological or emotional reasons.  In short, the market appears to be in a type of holding pattern waiting for some new news that will help to justify a significant move higher or lower.  The volatility VIX index also remains elevated at a level above 20 indicating that fears about a move lower still persist in the marketplace.

There really is no sure way to tell which direction the market will end up taking so the only real question is what you are going to do when the inevitable move happens.  I have always been a huge fan of keeping a stash of cash available for investment during market panics.  I use this cash to buy more of my favorite funds at discounted prices.  If I'm feeling adventurous I attempt to sell volatility and receive income from those who are panicking.  If you've heard that selling volatility is dangerous then you've heard right but in situations where there is panic selling this strategy is actually a very nice risk adjusted investment.  After all, due to the price discovery mechanism volatility over time is a naturally depreciating asset.  The key here as well as always is to not overdo it.  Smaller investments spread out over time usually perform way better than large one time investments.

Remember to always prepare for volatility before it strikes and you'll be one of those investors looking for bargains rather than one of those losing sleep every night.

Sunday, September 6, 2015

Is it necessary to take huge risks to create wealth?

Not only is it unnecessary to take huge risks to create wealth but it is actually counterproductive.  To me, creating wealth boils down to three basic ingredients: saving, investing, and time.  Often times, people will be lacking one or more of these causing a need to take greater risk in order to provide the same amount of return.  The big issue here is that it is not very likely that an increase in risk will lead to increased returns and actually more often than not leads to a higher likelihood of losses.  The easiest way that I’ve found to build wealth is to make sure that you are always taking maximum advantage of these three fundamental ingredients.

Saving is so important because it provides you with a base to invest from.  Lack of savings is akin to a farmer not having any seeds to grow the next years crops with.  A large portion of whatever you receive in income needs to be invested in order to allow for the growth of your money.  Saving can be hard especially if you live in an area with a high cost of living but it is absolutely necessary if you ever expect to grow wealth.  Think hard about what you need to get by with and then think harder about how to get by with even less.  Don’t worry, this frugality doesn’t last forever, in just ten years you’ll be thinking hard about what to do with all of the extra money you’ve got laying around.

Investment is equally important because this is where growth comes from.  Money under your mattress actually becomes less valuable over time due to the nature of inflation.  I think that a lot of people, including myself, tend to over complicate this aspect of wealth creation either by trying to time the market or by searching for rare and exotic investments that provide “increased” returns.  Again, these increased returns are not without increased risk and are therefore no better or worse than any other investment.  Take the easy approach and spread your money around into various types of investments in order to take advantage of diversification which is just a word for not putting all of your eggs in one basket.

Finally, time, I think is the most valuable of all three of these ingredients because it is essentially priceless.  In order to avoid having to take impossible risks later in life you need to make sure that you make the most out of every day that you have to invest.  Discount brokers offer commission free investing nowadays on a wide variety of products that allow one to take small amounts of savings and invest as often as weekly or even daily to take maximum advantage of time.  I buy when the market is up, I buy when the market is down and over time I essentially get a fair price.

Remember to always use these three key ingredients to your advantage and you'll be giving yourself a great chance at becoming wealthy at some point in the future.